Many Americans are getting more and more worried about their ability to live easily in retirement as the cost of living adjustment (COLA) for 2025 gets closer. The lower COLA that is expected compared to the current 3.2% adjustment makes people worry about the financial health of seniors, especially since inflation is still high.
The 2023 Employee Benefit Research Institute (EBRI) poll shows a big drop in people’s confidence in their ability to retire. This is the biggest drop in confidence since the Great Recession in 2008. 55% of seniors are worried that they will have to cut their spending a lot, and the expected COLA for 2025 could make these worries even worse.
COLA Impact
By taking inflation into account, the COLA is meant to keep the buying power of Social Security benefits safe. But the last few years have shown that this change might not fully explain why the cost of living is going up. The Senior Citizens League found that Social Security income has lost 20% of its buying power since 2010, even though the COLA went up by 5.9% in 2022 and 8.7% in 2023. The average retired worker would have gotten an extra $370 a month in 2024, or $4,440 for the year, if COLAs had kept up with inflation.
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With a COLA of about 2.6% expected in 2025, the problem could get worse. This is less than the 3.2% COLA for 2024 and the average of 2.75 percent over the last 10 years. This means that seniors may find it hard to keep up with rising costs. The table below shows how a 2.6% COLA might change the average Social Security income for different types of recipients.
| Beneficiaries | Social Security Payment | Payment Plus COLA | Extra Benefit |
|---|---|---|---|
| Retired Workers | $1,918 | $1,968 | $50 |
| Spouses | $911 | $935 | $24 |
| Survivors | $1,508 | $1,547 | $39 |
| Disabled Workers | $1,538 | $1,578 | $40 |
The official COLA for 2025 will be found once the inflation numbers for the third quarter are made public in October. But if the expected 2.6% rise comes true, it will be the lowest COLA since 2021, and it might not be enough to keep up with rising costs for retirees, especially in housing and health care.
Flaws in COLA Calculation
Some people say that the way COLA is calculated doesn’t really show how seniors spend their money. The Consumer Price Index (CPI-W) for Urban Wage Earners and Clerical Workers tracks inflation based on how much hourly workers spend. This is how COLA is calculated right now. But policy experts say this measure isn’t right for retirees because they spend less on things like clothes and transportation and more on things like housing, healthcare, and other necessities.
Some advocacy groups, like the Senior Citizens League and AARP, say that COLA should be linked to the CPI-E instead, which is the Consumer Price Index for the Elderly and better shows how people aged 62 and up spend their money. The CPI-E has consistently grown faster than the CPI-W. This means that if it were used, the 2025 COLA might be higher and better represent the inflationary pressures that Social Security recipients are facing.
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The CPI-E is three-tenths of a percentage point higher than the CPI-W on average for the first half of 2024. This means that the 2025 COLA might be three-tenths of a percentage point too low if it is figured the same way it is now. This difference could make Social Security payments even less valuable, leaving retirees with less money to meet their basic needs.
As October comes and the official COLA calculation gets closer, retirees should get ready for another adjustment that might not be enough. The need for a more accurate COLA calculation method has never been greater as the cost of living keeps going up. Using the CPI-E could help make sure that future COLAs better protect the financial security of seniors in the United States.
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